Measuring Tail Geopolitical Risk

Geopolitical risk is an important source of uncertainty for investors, financial institutions, and policymakers. However, conventional approaches provide limited insight into how geopolitical shocks affect portfolios during periods of market stress. This article develops a unified framework for measuring geopolitical tail risk by combining information from widely used uncertainty and geopolitical indicators into a consolidated geopolitical risk factor. Using daily returns for 44 national equity markets and 11 US equity sectors, the authors construct measures of tail geopolitical risk exposure (TGRE) and tail geopolitical risk contribution (TGRC). TGRE measures vulnerability to geopolitical tail events, while TGRC measures contribution to the transmission of geopolitical stress throughout the financial system. The results show that geopolitical risk is not priced in the mean; it is priced in the tails of asset return distributions. Markets with greater TGRE experience larger losses during periods of geopolitical stress, while markets with greater TGRC play a larger role in amplifying system-wide risk. Evidence from the Russia-Ukraine conflict and the October 7, 2023 attacks in Israel supports the economic relevance of the proposed measures. The framework provides a practical tool for portfolio construction, stress testing, geopolitical scenario analysis, and financial stability oversight.